The Road to Recovery Runs Through Rome
The scariest thing I read in the newspaper this last week was a story in the Los Angeles Times. On the front page, the article pondered whether small retail investors should get back in the market to take advantage of the latest rally.
That kind of story is scary because retail investors are often the ultimate contrarian indicator. If they are chomping on the bit to get back in the market, it may not be long for the smart money pulls the plug and fleeces them yet again.
As for the electronic media, the thing that I find most interesting about watching the pundits on the tube now is how excited so many of them are getting about a "rally" which has not even gotten us back above 8000 on the Dow. For me, the market must decisively break through that barrier on heavy volume in order for the current sideways pattern to be broken.
Sideways pattern? What the hell are you talking about Navarro? The market has been shooting almost straight up. Yes, it's been shooting up now. Just like it shot down when it fell through 8000 on the Dow. But look at the chart. The old support level of 8000 on the Dow has become the new resistance.
This is not to say that this latest rally has not been a great trading opportunity. As you read here in this column several weeks ago, GE, for example, was a great buy at eight dollars. I also opened up positions using call options (2011 leaps) in Intel, Delta, DuPont, and Citigroup early in this latest " rally."
The broader point here for my sideways caution—and this is a column based on macroeconomic analysis—is that the market has been responding fairly robustly to the ever increasing trillions that the Congress, the Federal Reserve, and the US Treasury Department are injecting into the system. What I am watching, however, is a bit more than this US money making (and debasing) machine.
What intrigues me the most in all of this economic recovery puzzle is the Eurozone. The news is decidedly not good.
The latest manufacturing data, as reported in the Financial Times, indicates the total "collapse in manufacturing orders in January." This was the biggest monthly drop since bureaucrats began collecting data in 1996 on this parameter. The only good news about this is that inflation is also falling faster than expected, which opens the door to a 50 basis point rate cut by the European Central Bank. The only question now is whether Europe can drive down its currency faster than Ben Bernanke can drive down the dollar.
The point of all this is that any global economic recovery ultimately must run through Rome and the rest of Europe. Why? Because European demand for Asian and American exports, as well as for Brazilian and Russian commodities is essential to recovery. And I'm just not seeing it.
What I love about the Europeans as they struggle with all of this is that they areso much damn smarter about economics than the Americans. For example, the Czech prime minister last week accurately condemned American economic policy as "a way to hell." German Chancellor Angela Merkel was a bit more intellectual about it but essentially said the same thing: "The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn't just that the banks took over too many risks. Governments allow them to do so by neglecting to set the necessary financial market rules and, for instance in the US, by increasing the money supply too much."
I for one would take a swap straight up now of Angela Merkel for Barack Obama and Jean-Claude Trichet, the head of the European Central Bank, from Ben Bernanke. Sedition you say. Oh, get a life.
Bottom Line: Watch for the Dow to break decisively above 8000 before you get too carried away on the bullish side. Pay attention to what happens beyond our parochial borders.
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